What Harvard Law Students Should Know About Reining In Corporate Welfare

First, the bad news: there is a serious public policy problem at which lawyers, when swinging for the fences, have repeatedly struck out. Now the good news: lawyers, when working with community organizers and labor leaders, are winning terrific precedents.

The policy problem is corporate welfare, especially when states and localities (not counting Uncle Sam) spend an estimated $70 billion per year on “economic development incentives” that are all too often windfalls extracted when companies exploit federalism to whipsaw states against each other.

In a Darwinian corporate version of rising inequality, the problem has gotten much worse the past decade, with the soft economy creating more desperate politicians. Whereas we used to count about 10 “megadeals” per year (essentially deals costing taxpayers nine or ten figures each) for a total of $3 billion annually, we are now counting about 20 megadeals per year costing more than $6 billion.

Boeing’s record $8.7 billion deal from Washington State and Tesla’s $1.3 billion package from Nevada are but two high-profile examples. Illinois Gov. Pat Quinn lost office in part due to anger over three huge packages (Sears Holdings, Motorola Mobility and CME) and New Jersey Gov. Chris Christie has spent more than $5 billion in five years, including more nine-figure deals than any governor in U.S. history (eight and counting).

If you were to attach partisan labels to these states’ executives, you’d have two from each major party, and that’s indicative of the bipartisan dogma driving this ruinous trend: most elected officials think tax cuts create jobs, despite many forms of evidence to the contrary.

The highest-level legal assault on large, company-specific deals was the case Cuno v. DaimlerChrysler, concerning subsidies given for a new Jeep plant in Toledo, Ohio.

The plaintiffs were represented by Northeastern Law School Prof. Peter Enrich, whose students assisted him as the case won on appeal before the Sixth U.S. Circuit and was granted certiorari by the Supreme Court in 2005. However, rather than opine on the Commerce Clause issue at hand, the Court ultimately ruled in 2006 that the plaintiffs lacked standing in federal court. Charlotte Cuno, a tiny grandmother who served as the name plaintiff, attended the oral arguments and sensed the Court’s inclination; she raged afterwards to the news media, citing her grandchildren’s struggling, disinvested schools as evidence of her family having been harmed by Toledo’s eroded tax base.

The Cuno case provoked an enormous amount of blowback. Two K Street coalitions were formed (by Ernst & Young and the Council on State Taxation) to file amicus briefs: against Cuno and her co-plaintiffs stood 37 states, almost every association of state and local elected officials, many individual companies and even the United Auto Workers who represented the plant’s hourly workforce. As a contingency, federal legislation was also introduced (with bipartisan sponsorship from all eight senators in the Sixth District) that would have legalized the “war among the states” (since the Commerce Clause grants Congress the authority to regulate commerce among the states).

Another lawyer who tried mightily to legally nullify deals is Robert F. Orr, who retired early from the North Carolina Supreme Court to direct the North Carolina Institute for Constitutional Law. Using state constitutional arguments, he sought to invalidate three high-profile deals, including the state’s largest-ever deal granted to Dell in 2004 and another package to Google. None of the cases succeeded.

While these legal efforts to overturn incentives altogether have not prevailed, lawyers have played critical roles in past disputes concerning the abuse of economic development subsidies, which in turn have resulted in significant reforms to make development spending more transparent and accountable. Lawyers are also on the forefront of some of the most exciting efforts to make subsidies really deliver for working families.

In a series of lawsuits during the late 1980s and early 1990s, cities or workers sued companies that had received incentives and were now closing factories. Duluth, Minnesota, saved its largest factory, Diamond Tool, in 1988. Workers at American Home Products in Elkhart, Indiana won a $24 million settlement in 1992. Ypsilanti Township in Michigan prevailed at trial but lost on appeal against General Motors. Other cases with mixed results occurred in New York State, Ohio, Illinois and West Virginia. A Fordham Law Journal article summarized the legal theories they employed.

Thanks to these cases, which often amounted to dislocated workers going down swinging, the addition of “clawbacks,” or money-back guarantee language, became common nationwide in state and local economic development law and contracts. These and other accountability safeguards, such as disclosure of costs and benefits and job-creation and job quality standards (i.e., wage and benefit rules) became mainstream best practices.

In California, the co-founder of the Los Angeles Alliance for a New Economy (LAANE), attorney Madeline Janis, co-pioneered the use of Community Benefits Agreements. These private contracts between community-labor coalitions and private developers ensure that local residents benefit from major redevelopment projects with provisions such as local hiring, living wages, affordable housing, environmental easements and/or set-asides for local social-service providers or merchants. The agreements are in turn appended to public redevelopment contracts, strengthening their enforceability.

Today, Janis is using her legal skills to rewrite the way U.S. transit agencies procure buses and railcars, to favor higher domestic content and more hiring of disadvantaged workers and veterans. LAANE’s Jobs to Move America campaign won Federal Transit Administration approval of its alternative U.S. Employment Plan model for Requests for Proposals to be issued by transit agencies. The Plan has already been embraced by some agencies, including the Chicago Transit Authority for a $2 billion purchase.

There remain many live legal issues in economic development today. Progress Ohio unsuccessfully litigated the constitutionality of Ohio Gov. John Kasich’s privatization of the state’s development department, now known as JobsOhio. Hotel and casino workers in Atlantic City found a legal avenue to petition for a proposed subsidy for a new, unwanted hotel/casino to be on a ballot, where it would likely have been defeated (had the state not retroactively stripped the petitioners of the ballot right).

Our cumulative takeaway from all of this history is that the court of public opinion matters greatly when one is trying to unravel $70 billion a year worth of vested interests. Absent a public educated about the recurring failures and collateral damage of tax-break deals, litigation against programs per se face daunting odds.

That’s why, in addition to raising up positive legal precedents, we at Good Jobs First have published more than 100 studies explaining how subsidies gone awry are undermining public services and especially public education, fueling inequality, paying for suburban sprawl and favoring affluent suburbs, subsidizing private for-profit prisons, favoring poverty-wage retailers like Walmart, favoring the corporate One Percent over small business, paying companies to create “new jobs” by merely moving short distances within a metro area but across a state line, providing “megadeals” costing more than $1 million per job on which taxpayers can never break even, and, note this, allowing companies to secretly keep employees’ state personal income taxes and consumers’ state sales taxes.

A major regulatory breakthrough is also looming: the Governmental Accounting Standards Board (GASB) will in August 2015 issue a new standard that we expect will effectively require states and cities to account for the revenue they lose to economic development tax breaks. This is the first time GASB has ever weighed in on the issue and there may be legal interpretation and compliance disputes as the rule takes effect in 2016.

Finally, a challenge for creative lawyers: powerful, secretive “site location consultants” represent most big firms in “war among the states” episodes (sometimes even pulling down commissions of up to 30 percent of the subsidies they negotiate), but no state regulates them or requires they register as lobbyists. An aggressive use of state FOIAs to examine their roles in high-cost deals might reveal compelling evidence they deserve to be so regulated.

Greg LeRoy, who is not a lawyer, directs Good Jobs First and is the author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation (Berrett-Koehler, 2005).